Have you ever wondered about the recent surge in people driving more luxurious cars over the past few years? Or how individuals are managing to afford these high-end vehicles? The answer lies in a relatively recent form of car finance agreement called Personal Contract Purchase (PCP) plans, which have quietly risen to prominence, dominating the market.
These loans have the advantage of making it possible for you to purchase a vehicle that might have been previously out of your financial reach. However, the downside is that they are incredibly intricate and laden with numerous clauses and intricacies.
PCP car finance has become the prevailing credit option in both the new and used car sectors, with over 90% of car finance deals involving this type of credit. The numbers are staggering. In 2021, despite the pandemic, lending related to car finance reached a whopping £41 billion, rebounding to pre-pandemic levels comparable to the £48 billion in loans recorded in 2019. Source ( themirror.co.uk )
But what’s the catch? PCP car finance is so intricately designed that understanding its mechanics, identifying cases of mis-selling or misleading practices, and finding a way out of unaffordable deals is nearly impossible.
However, this landscape is changing. Car finance has emerged as the second most complained-about product according to the Financial Ombudsman, and this is likely just the tip of the iceberg.
Here’s a comprehensive guide to car finance and your rights.
Exploring PCP Car Finance:
A PCP deal resembles a hire purchase (HP) agreement, allowing you to potentially “own” the car, even though the retailer retains ownership for the loan’s duration. Unlike traditional HP agreements where you would own the item outright after paying monthly instalments, PCP deals function differently and come with added responsibility for any damage to the vehicle in most cases.
The significant difference lies in not committing to buying the vehicle outright; instead, you receive credit for a portion of the vehicle’s value rather than the whole amount. At the end of the agreement, you can return the car for a new one or purchase it outright with a lump sum payment. However, it’s not as straightforward as it seems.
Unravelling PCP Car Finance:
The financial services industry often reimagines credit forms over time, and PCP deals emerged to accommodate the desire to switch vehicles every few years. Here’s how they work:
- You pay a deposit that represents a portion of the car’s value.
- You enter into a credit agreement with interest for a segment of the car’s value over a fixed period.
- At the agreement’s conclusion, you can either buy the car outright with a predetermined “balloon” payment (the remaining car value after deducting the loan and deposit), return the car, or use potential credit from the loan to contribute to a new deposit if the car’s value has declined.
- However, there are other costs such as mileage charges beyond a certain limit and fees for minor damage.
- These costs, once covered by the HP provider, now require additional insurance policies, adding to the overall bill.
Challenges and Mis-selling:
PCP deals might appear enticing, offering access to a more luxurious car than one can afford outright. However, these loans are exceptionally complex and involve a deposit, credit agreement, insurance, product-specific insurance, lump sum payments, and various conditions that could leave you owing more.
Issues often arise with mileage costs, damages upon returning the car, and high balloon payments. Borrowers can find themselves encouraged to take on more debt than they can handle, making a seemingly affordable car a costly one due to high insurance, running, and repair expenses.
The ongoing mis-selling concerns are fueled by cases of borrowing beyond means, incomplete disclosures, and unethical sales practices. The Financial Conduct Authority (FCA) has taken action by banning commission payments to car salespeople that incentivize the sale of higher-rate products.
Your Rights and Seeking Resolution:
Complaints about car finance have surged in recent years, and many individuals are seeking assistance with their loans. You have the right to complain about various aspects:
- Mis-selling of financial agreements, including affordability issues, lack of cost transparency, misleading information, and selling more expensive deals than desired.
- Commission-related concerns, where undisclosed commissions or unsuitable deals due to commissions can be contested.
- Financial difficulties such as repossession, debt collection, and lack of assistance from the firm when struggling with the credit agreement.
- End-of-agreement problems like unexpected charges, damage costs, failed credit refunds, balloon payment discrepancies, and mid-term cancellation complications.
- Complaints regarding additional insurance products like hubcap, alloy, bumper, and windscreen coverage.
Car finance is regulated by the FCA, meaning even dealerships must adhere to strict sales rules. They should explain the deal, charges, and balloon payment clearly. If an issue persists, escalating the matter is possible.
Keep your documents and records of the deal’s understanding. Despite the complexity, mis-selling concerns, and market intricacies, knowing your rights and seeking resolution can safeguard you from falling victim to potential mis-selling practices in the car finance arena.